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Glossary

AAA The highest rating for corporate securities such as bonds, it reflects the unquestioned solidity of the instrument. The rating is issued by Standard and Poors and Moody, two US credit rating agencies.

Accrued Interest The interest that a bond has earned since its most recent coupon was paid. The price for bonds ignores this element and quotes the price of bonds without accrued interest. However a buyer would have to pay for the interest that has accrued.

After Hours Dealing Deals made between members of the Stock Exchange after the offical close of the market. Many shares and bonds are now quoted on more than one market and the Exchange allows dealers to buy or sell outside offical hours. These transactions are usually treated as having been done at the start of the following business day.

Arbitrage The concept of making a profit without risk and without any net outlay of capital. The arbitrageur will simultaneously buy and sell the same asset or two bundles of assets that amount to the same and profit from the difference in price. For example an arbitrageur would simultaneously buy one bond contract in London and sell one bond contract in Germany at a higher price locking in a profit because at that moment in time the price on the two markets are different. There are many different types of arbitrage using many underlying instruments.

Asset Within a portfolio shares, bonds and property are known as assets. Generally the term refers to something that has a realizable value or will generate net revenues greater than the cost of the item itself. An asset is aBargain The colloquial name for a transaction on the Stock Exchange.nything that might be set against liabilities

Base Rate The lowest rate of interest that banks will charge for loans and deposits. It is related to the money markets which are in turn influenced by the minimum lending rate. The interest rate on most loans can be quoted as a percentage over base rate. In the UK, the Monetary Policy Committe of the Bank of England is responsible for setting interest rates.

Basis Point A basis point is 100th of a percentage point. It is used in currency and bond markets where the sizes of trades mean that large amounts of money can change hands on small price movements. Thus, 100 basis points equal 1%. A bonds yield that has increased from 6.00% to 6.70% would be said to have risen by 70 basis points.

Bear and Bull Markets A bull market is one where share prices generally have been rising across the whole market for some time. A bear market, on the other hand, is where prices have been falling for some time. Investors who believe the market will rise are bullish and those who think the market will fall are bearish.

Bid The price at which a market maker is prepared to buy stock and the private investor is able to sell. The converse of the offer price which is the price at which a market maker is prepared to sell stock. Hence the expression "the bid-offer spread".

Bond Rating The risk of a bond issuer going into default and failing to pay the interest and/or the capital due on the bond is rated by several credit organisations. The best known are probably Moodys and Standard and Poors. For Standard and Poors the credit ratings range for AAA the best to D, meaning that the bond is already in default. Bonds with a rating of BBB or better are considered an investment grade and good enough for institutional investors. Bonds graded below this are normally termed as junk bonds.

Bond Bonds are debt that pay a fixed rate of interest (except in a few cases such as zero coupon bonds - see zero coupon bonds) issued by companies and governments. The repayment of the principal is due at a pre-determined date called maturity. UK government bonds are known Gilt-Edged Stocks or Gilts for short (see Gilt-Edged Stocks).

Book Price or Book Cost The cost per share at which a holding of any financial instrument was bought, including all costs such as stamp commission etc. If more, say, shares are bought later, it is usual to calculate an average book cost for the whole holding.

Broker Professionals who buy and sell shares on behalf of their clients.

Bulldog Bonds Bonds issued by governments in sterling other than the British Government gilts.

Buy and Hold Strategy A passive strategy that entails purchasing a companys shares and holding on to them over the long term as opposed to the more active strategies of trading in and out of shares on a frequent basis.

Capital Gains Tax A tax on the increase of a value of assets realised in a particular year. Tax is payable on gains above an individual’s Capital Gains Tax allowance. The rate at which the tax is payable can vary and will typically be announced in the Government’s Budget Statements.

Closed End Fund Closed End Funds usually refer to investment trusts. They are companies whose shares are traded on the stock exchange. Because of this the number of shares that the Fund Portfolio is divided into is fixed, unless the fund has a new share issue. This means that those wishing to invest in the fund have to buy shares on the secondary market. As a consequence, Closed End Funds rarely trade at Net Asset Value, their price being determined by supply and demand.

Consumer Price
Index (CPI) The
the official measure of inflation of consumer prices of the United Kingdom. The CPI calculates the average
price increase as a percentage for a basket of 600 different goods and
services. Around the middle of each month it collects information on prices of
these commodities from 120,000 different retailing outlets.

Corporate Bond A Bond issued by a company. Bonds are debt that usually pay a fixed rate of interest. The repayment of the principal is due at a pre-determined date called maturity.

Coupon Yield The amount of interest expressed as a percentage of the book cost (see book price) which an investor will receive each year on his bond or gilt.

Coupon 1. The fixed rate at which interest is paid on a bond. 2. The physical ticket attached to a bearer certificate that, when presented to the appropriate authority, usually a bank, will be redeemed for the dividend.

CREST The system used within the London Stock Exchange whereby shares are registered and settled electronically.

Debenture A fixed interest stock (bond) secured on the assets of a company. In the event of the liquidation of the company, the owners of the debentures would be paid before the holders of loan stock, preference shares and ordinary shares. They would, however, you will be surprised to hear, be paid after the Inland Revenue, the liquidator and the banks.

Discount 1. The margin by which a share stands below its net asset value, particularly investment trusts which are often judged on this basis. 2. The amount by which a bond or bill is issued under its maturity value in order to make it more attractive to potential investors.

Discretionary Portfolio Management An account where the broker, adviser or investment manager manages the client's portfolio without referring to the client or asking the clients permission to implement investment decisions which will be made by the investment manager. In all cases the investment objective will have been decided between the investment manager and the client. The client will be kept informed of all transactions and the value of the portfolio on a regular basis.

Diversification Reducing risk by spreading investments among different investments, sectors, markets and instruments.

Downgrade The reduction of the forecast profits or earnings for a company or the prospects for the share price or the reduction of a credit rating for a bond.

Efficient Portfolio A portfolio which provides the best possible return for a given level of risk, or which offers the least risk for a given return.

Emerging Markets An emerging market is the stock exchange of a country with a low income per capita but where industry is developing in such a manner that the country can be expected to have a greater influence on the world economy. There are likely to be stringent controls in the inward and outward flow of investment capital. Emerging markets have the potential to produce rapid but volatile economic growth.

Equity The value of a company, which is the property of its shareholders in the form of stocks as opposed to bonds. These shares are commonly called equities.

Eurobond A Bond which is issued by a Government or international corporation outside its country of origin and issued on the eurobond market. This is an important source of capital for international corporations and governments.

Exchange Traded Fund (ETF) A Unit Trust / Investment Trust hybrid, the ETF is a tracker collective fund which can be traded on a stock exchange at net asset value.

Execution-Only Service Broking service which executes buy and sell orders for clients, but does not offer any investment advice or portfolio management.

Face Value The nominal value of shares in a company that appears on the face of the certificate or document of entitlement. For example: 'ordinary 25p'. The nominal or face value bears little relationship to the market value. Rather it is important in respect to the Authorised Share Capital. The Authorised Capital is the number of shares that the company is allowed to issue multiplied by the face value. The Issued Capital is the amount of shares that have actually been issued to shareholders multiplied by the face value. For debt instruments, face value relates to the amount to be repaid at maturity. This is also known as par or nominal value.

Fixed Income Security Also known as a fixed interest security is a security on which the borrower agrees to pay fixed amount of income at regular intervals, often half yearly. The principal will be repaid at a specific date in the future.

Fixed Interest Often used as a synonym for bonds. Fixed interest securities are a form of debt paying interest every year until they are redeemed at maturity.

Floating-Rate Note A bond paying a variable interest rate. The rate is linked to those of the wholesale money markets, normally the London interbank rate or LIBOR. There are variations such as drop lock bonds whose interest rate floats until a specific trigger event happens when the interest rate becomes fixed for the rest of the bonds life. Flip flop floating rate notes. A long dated floated rate note which can be converted into a short dated floating rate note and then if the holder wishes back into a long dated one.

FSCS (The Financial Services Compensation Scheme) The UK's compensation fund of last resort for customers of authorised financial services firms. Where you canfind out whether it could compensate you when a firm goes bust.The FSCS can cover eligible individuals who are or were customers of an authorised financial services firm that has been declared in default

Gilt-Edged Stocks Gilts are bonds issued by the UK government to fund its debt. Gilts are normally redeemed at face value between specified dates which can be up to forty years away. Short dated or short gilts have a life span of five years or less, medium dated are between five and fifteen years and those with more than fifteen years are long dated or longs.

Gross Domestic Product Annual value of goods sold and services paid for inside a country in a period of time, usually a year or a quarter. Included are goods only for final consumption or investment as all the costs incurred at various stages of production are reflected in the final price. Gross Domestic Product is distinguished from Gross National Product by the exclusion of income on investment abroad.

Guaranteed Stock This is a bond, which is issued perhaps by a public body where the investor is given the comfort of knowing that a third party is guaranteeing the issue.

Hedge Fund Fund which is usually formed as a partnership or an offshore investment corporation, open to a small number of wealthy investors which invests in many markets often taking large risks on speculative strategies. Hedge funds may use derivatives and take long and short positions, so they can potentially profit in any market environment.

Income Funds generated from an investment usually as a proportion of profits.

Index-Linked Gilts Security issued by the UK Government whose principal and interest payments are tied to the retail price index.

Inflation The term used to describe rising prices and the amount by which money loses it purchasing power. A very low rate of inflation, i.e. below 3%, is considered beneficial in keeping the country's economy buoyant or in the very least it is seen as harmless. However high rates of inflation erode savings and the value of money.

Initial Public Offer (IPO) A new issue. The first offering of shares to the public in a previously private company by listing on an exchange. A device used by companies to raise funds.

Investments Trusts An investment trust is a company whose purpose is to invest in other companies. Shares in the investment trust are traded on the Stock Market in the same way as any other share. The share price is reflected by the success of the Fund Managers. Investment trusts are useful for small investors since the fund normally will invest across many companies and several industries. An investment trust is different from a unit trust because it is quoted and has a fixed number of shares.

ISA The Individual Savings Account (ISA) was launched by the government to encourage people to save for the future. It is a tax-efficient wrapper in which you can hold either stock market-based investments or a traditional savings account. As an incentive, any interest earned on savings or bonds and any capital gains made on investments held within an Isa are tax free. This is particularly attractive to those on higher incomes who are taxed at the rate of 40% on all their savings and investment income.ISAs replaced personal equity plans (PEPs) and the tax exempt special savings accounts (TESSAs), which closed to new investors in April 1999.The maximum subscription to a stocks and shares ISA is £11,280 pa (effective 6th April 2012) and a Cash ISA £5,640.

Issuing House As the name suggests Issuing Houses issue shares on behalf of companies trying to raise capital. This can be either through the Company issuing the shares direct to the public which are then underwritten by the Issuing House, or by the Issuing House buying the shares itself and then selling them on to the public.

Junk Bond Normally a high yield fixed income security that has a very low credit rating. This normally means below Grade BB in Standard & Poors bond rating which makes them more volatile than investment grade bonds.

Kicker An extra benefit, possibly to add extra lift to a bond. Also known as a sweetener.

Limit Order An order where the buyer or seller of a security or commodity has a set limit on the price or the time allowed for the contract to be completed. The broker will execute the trade only within the price restriction.

Liquid Market A market, which permits relatively easy entry and exit of large ordres because there are so many buyers and sellers. Usually a characteristic of a popular market.

Loan Stock A fixed interest stock that may or may not be secured against all or a specific part of the assets of a company. The interest will be paid whether the company is profitable or not. In the event of the liquidation of the company (when interest will not be paid), loan stock holders will be paid out before preference shareholders or ordinary shareholders are considered, but after debenture holders have been paid in full if possible. (see Debentures)

Long Bond 1. Any long dated bond, typically with a term of more than 10-15 years 2. The 30-year US Treasury bond.

LSE The London Stock Exchange (LSE)is the primary stock exchange in the U.K. and the largest in Europe. Originated in 1773, the regional exchanges were merged in 1973 to form the Stock Exchange of Great Britain and Ireland, later renamed the London Stock Exchange (LSE). The Financial Times Stock Exchange (FTSE) 100 Share Index, or "Footsie", is the dominant index, containing 100 of the top blue chips on the LSE.

Market Maker Market makers are firms or individuals, prepared to make continuous markets at quoted bid and offer prices, in the stocks they are registered to trade. They display buying and selling prices on the stock markets SEAQ computer system along with the size of deal they will accept which may be governed by the Normal Market Size rules.

Market Size The number of shares in which a market maker is prepared to deal, eihter as a buyer or seller, at his advertised bid/offer spread.

Maturity Repayment date for investment, applied to a bond or life insurance policy.

Merchant Banks Institutions whose primary aim is to raise money for the corporate sector. Nowadays they carry out a variety of financial services such as acceptance of Bills of Exchange, placing of loans and securities, Unit Trust and portfolio management and some banking services. Merchant banks also advise companies on mergers and other financial matters.

Middle Market Price The average between the price at which a stock can be sold and the price at which a stock can be bought. The middle market price is the one normally quoted in the newspapers.

Mutual Fund Known also as an open ended fund, or in the UK as unit trusts, are pooled investment vehicles. They mostly invest in stocks and bonds of companies and public authorities. They offer the small investor the chance to spread their investment widely. An investor who wishes to invest in a mutual fund simply buys new shares in the fund, which then expands in size. Sellers can only sell their shares back to the fund, which shrinks accordingly. Specialist companies typically run mutual funds.

Net Asset Value (NAV) The value of the total assets of a company, less the sum of its liabilities, loan stock and debentures.

Nominal Value The value ascribed to a share when it is first authorised and issued by a company. Bears no relation to a share's value.

Nominee Holding Securities owned by an investor but which are registered in the name of the nominee company of a broker for ease of administration and cost. Although the nominee name will appear on the share register, the investor remains the beneficial owner. Holdings of over 5% must be declared.

Offer Price The price at which a dealer will sell a security in the market.

ORB On 1 February 2010, the London Stock Exchange launched the electronic Order book for Retail Bonds (ORB). It offers electronic trading in gilts and retail-size corporate bonds, i.e. those which are tradable in smaller, more manageable denominations of £1,000 or similar. It also provides corporate issuers with an efficient mechanism for distributing bonds to private investors.

ORBIG The Order Book for Retail Bond Issuer Group. Designed to provide a unified voice for retail bond issuers and educate the financial community on the benefits of retail bonds for companies and investors. Further information can be found at orbig.co.uk

Portfolio Theory Originally developed by Harry Markovitz in the early 1950's, the Portfolio Theory is intended to provide a mathematical framework by which investors can minimise risk and maximise returns. A central concept of the theory is that risk can be reduced by diversifying holdings, and that returns are a function of the expected risk.

Quote Driven A system used by the Stock Market, usually electronic, in which prices are initially determined by quotations of dealers, or market makers. It is the opposite of an order driven system where prices of securities react to orders. In both cases market values will eventually prevail.

Retail Bond A Bond is simply an 'IOU' in which an investor agrees to loan money to an individual, company or government in exchange for a predetermined interest rate for a defined period of time.

RDR The Retail Distribution Review (RDR) was launched by the Financial Services Authority with the aim of giving consumers greater confidence and trust in the retail investment market. Central to the RDR has been the aim of raising the professional standards of investment advisers, giving consumers greater confidence in the advice being offered and ensuring that fees charged are transparent. The outcomes of the RDR apply to all retail investment advisers.

Redemption The repurchase of a security by the issuer on maturity. A corporate action in which a company pays repays the loan stock to stock holders. Also known as a "repayment". Date when a security is redeemed.

Risk and Reward Risk is the possibility that an investment will not produce the expected rewards. Therefore the rewards must rise to compensate for the greater elements of risk.

SEAQ The Stock Exchange Automated Quotation system is a computer based, quote driven, trading system that displays market makers buy and sell prices. The system registers the size, time and price of every deal and therefore ensures that deals are executed at the best available prices.

SETS Stock Exchange Electronic Trading Service, an order driven, electronic system introduced by the Stock Exchange in 1997 to match bargains between buyers and sellers, without using the market makers. SETS matches the most liquid stocks. The system is capable of processing four types of orders; Limit ( buy at up to 100p a share) ; At Best; Fill or Kill (all or nothing); Execute and Eliminate (buy as much as possible at the specified price).

Settlement The payment of cash for securities and, conversely, the delivery of securities against payment - the conclusion of a securities transaction by delivery.

Share certificate This is a document representing ownership of a shareholding. If stock is held in certificated form, the certificate must be delivered to the market upon sale.

Shares Shares represent ownership of a portion of the company and the right to receive a share in the profits. Normally shareholders are entitled to receive the company's accounts, attend its general meetings and vote on proposals.

SIPP First introduced in 1989, Self-Invested Personal Pensions (SIPPs) have grown in popularity and are now used by well over 800,000 investors in the UK to save for their retirement. SIPPs are tax-efficient “wrappers” that are put around investments to ensure they benefit from the considerable tax advantages that pension savings attract. A wide range of investments may be held in a SIPP – from shares, unit trusts and bonds to commercial property, gold bullion and securitised derivatives – and the decision on what and when to buy, and when to sell is the investor’s to make. Successful investment choices may achieve a much bigger pension fund and retirement income than other types of pensions.

Spread The difference between the price at which a marketable security is bought and sold. This is the Market Makers turn or profit.

Stamp Duty A form of taxation applied as a percentage of the value of share transactions made in the UK.

Stockbroker An individual or company who buys and sells securities on behalf clients while not acting as principal.

Stop Loss An instruction to sell a security should the price fall to a pre-specified level.

Term The length of time until the maturity date of a bond when the principle will be repaid.

Touch The best bid and offer prices for a security currently available in the market. This may not be the two-way price of one market maker but is derived from prices submitted by all market makers.

Tracker Fund A fund whose components mirror the composition of a stock exchange index, often the FTSE 100 and hopes as a result to mirror the performance of the relative index.

Transaction Costs Normally the mark up charged by market makers, agents' fees, taxes on fees and possibly a charge levied by the stock exchange itself, along with stamp duty.

Treasury Bonds A fixed interest security issued by the US Treasury to meet its long term funding needs. As such it is the American equivalent of the UK Treasury Gilt.

Trend Refers to the direction of prices. An uptrend is a succession of higher highs and higher lows; a downtrend is a succession of lower highs and lower lows. Trends can be classified into major: one year or longer, intermediate: one to six months, or minor : one month or less.

Unit Trust An open-ended fund which pools cash from many investors to establish a diversified portfolio. A Unit Trust continuously creates and cancels its units with demand. The price of each unit is reflected in the value of shares held by the Trust (NAV). Known as Mutual Fund in the US.

Value Investing Value investors seek out hidden 'value' that the market has missed. They invest in what they consider to be undervalued stock and wait for other investors to reach the same conclusion. Shares whose price is below the net asset value of a company are often sought by value investors.

Volatility The statistical measure of the price variation of an instrument over a period. An instruments volatility rating is a calculation of how volatile an instrument is by calculating how much its performance is divergent from the normal pattern.

Volume Total number of individual financial instruments or contracts traded in a particular period (hour, day, week, month etc.).

Yellow Strip The Yellow Strip refers to the best bid - offer prices available on the London Stock Exchange at a particular time.

Yield The percentage return on an investment, usually expressed at an annual rate. Current yield refers to the income from security as a proportion of its current market price. Redemption yield is an adjustment of the current yield of a redeemable stock to take account of capital gains or losses on redemption at par.

Yield To Maturity Yield that would be realized on a bond or other fixed income security if the bond was held until the maturity date. It is greater than the current yield if the bond is selling at a discount and less than the current yield if the bond is selling at a premium.

Zero Coupon Bond A bond that pays no interest but is issued below par to provide a capital return on redemption.

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